IS INFRASTRUCTURE SPENDING REALLY ECONOMIC-FRIENDLY?
Majority of proposed solutions or suggestions to prevent economic recession involves heightening public infrastructure expenditures. Probably this is the reason that road across your street is always under repair, or your monday is heavily burdened again with traffic due to constant transportation fixtures. While these are often deemed by administrators as positive, there is no concrete evidence yet of its actual contribution to save or reform a country’s economy.
Aside from the usual statements that constant infrastructure tweaks cause a surge in demand and employment, a deeper look into this stimulus theory will reveal that there are several loopholes behind its seemingly efficient front.
One primary concern is that this belief does not take into account any opportunity cost, had infrastructure spending occur in the midst of a high unemployment rate. Instead, it gives rise to the idea that this is a contributor for economic growth. However, all this expenses result to new money paving its entry into the economy, which may not be relative to all areas. For example, if increased expenses bolster demand and prices faster in an area, it may shift production away from other areas wherein some private individuals choose to dedicate their funds. Given this, although the economy will benefit from a short-term employment hike, repercussions of misallocations may cause further damage in the future.
Plus, in reality, infrastructure spending results to a complete opposite of what its concept suggests, since this triggers a huge sum of implementation costs. It does not provide any economic feedback as well, since government expenses do not produce a computable market value. This means you cannot really determine if all those highways and bridges are an appropriate usage of resources. It would be more fitting to use these resources in private negotiations than in government bonds since they shrink the economy to a considerable amount.
Moreover, these projects are likely to be results of political motives rather than economic ones and for the most part, they tend to be abandoned or have a slow progress due to lengthy permitting assessments. A study also showed that although establishments add credit for sustaining growth, improvement of economic rate remains the same as it was even before the construction began.
So the next time you hear about another proposal to build something to combat recession, think twice before jumping to conclusions that these alone would act as saviors of your dwindling economy.
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